Thursday, January 10, 2013

Bubbling Up...1/10/13

After 4 and 3/4 years and 932 posts (counting this one), I’m putting down my pen as “the EconomistMom” (capital-E, capital-M, smooshed together) and going back to being (more ordinarily) just (an) economist mom. (I think in my older (i.e., younger) days I would have been anal about it and set a target of ending at the 1,000th post mark.)

Woj’s Thoughts - While earning a Master’s in Public Administration at George Washington University, I was fortunate to have Dr. Lim as a professor on tax and budget policy. She helped reignite my interest in economics and offered guidance throughout my decision to pursue a PhD. Her presence in the blogging world will certainly be missed, although I’m sure she will continue to have a positive impact in the field through her role at Pew Charitable Trusts.2) Why do people think economists are charlatans? by Noah Smith @ Noahpinion

Zingales either performed a survey or reviewed a survey (I can't remember which) that compared economists' and non-economists' positions on policy issues. The paper found quite a bit of disagreement, but here's the really interesting part: When normal people were told the position of the economists, they changed their positions in the opposite direction. In other words, saying that "economists believe X" made people less likely to say they believed X!

…

Most American economists believe mercantilism to be a debunked idea, a false doctrine refuted since the time of Adam Smith. In fact, the collective memory of this "great victory" may be one thing that makes the free trade consensus so precious to Smith's successors in the Anglo-Saxon world. But remember, Adam Smith (though possessed of an excellent last name) lived in the time of literary economics, when empirical evidence was not much of a check on logical argumentation.

What does the empirical evidence tell us about mercantilism today? Well, it's difficult to say, but it is worth noting that all the countries that have become rich in recent decades have employed extremely mercantilist policies.

Woj’s Thoughts - Noah offers a few quotes from a recent Dani Rodrik paper that discusses empirical data on the success of mercantilist policies. Having recently taken first-year Micro, I was once again reminded of the simplicity behind the benefits of free trade. However, as a student of history, it’s hard to argue with the apparent success of mercantilist policies across developing countries during the past couple centuries. Trade may be an issue where theory, while correct, simply does not match up well with historical experience. If economists hope to be taken more seriously on these issues, then regardless of the outcome, the time has come to truly study the empirical data. 3) Why Are Real Interest Rates So Low, and Will They Ever Bounce Back? by David Glasner @ Uneasy Money

First, it can’t be emphasized too strongly that low real interest rates are not caused by Fed “intervention” in the market. The Fed can buy up all the Treasuries it wants to, but doing so could not force down interest rates if those low interest rates were inconsistent with expected rates of return on investment and the marginal rate of time preference of households. Despite low real interest rates, consumers are not rushing to borrow money at low rates to increase present consumption, nor are businesses rushing to take advantage of low real interest rates to undertake shiny new investment projects. Current low interest rates are a reflection of the expectations of the public about their opportunities for trade-offs between current and future consumption and between current and future production and their expectations about future price levels and interest rates. It is not the Fed that is punishing savers, as the editorial page of the Wall Street Journal constantly alleges. Rather, it is the distilled wisdom of market participants that is determining how much any individual should be rewarded for the act of abstaining from current consumption. Unfortunately, there is so little demand for resources to be used to increase future output, the act of abstaining from current consumption contributes essentially nothing, at the margin, to the increase of future output, which is why the market is now offering next to no reward for a marginal abstention from current consumption.

Second, interest rates reflect the expectations of businesses and investors about the profitability of investing in new capital, and the expectations of households about their future incomes (largely dependent on expectations about future employment). These expectations – about profitability and about future incomes — are distinct, but they are clearly interdependent. If businesses are optimistic about the profitability of future investment, households are likely to be optimistic about future incomes. If households are pessimistic about future incomes, businesses are unlikely to expect investments in new capital to be profitable. If real interest rates are stuck at zero, it suggests that businesses and households are stuck in a mutually reinforcing cycle of pessimistic expectations — households about future income and employment and businesses about the profitability of investing in new capital. Expectations, as I have said before, are fundamental. Low interest rates and secular stagnation need not be the result of an inevitable drying up of investment opportunities; they may be the result of a vicious cycle of mutually reinforcing pessimism by households and businesses.

Woj’s Thoughts - Countering the views of market monetarists, Glasner provides his own thoughts on why real interest rates remain low today. It’s fascinating to note the combination of a Keynesian-demand side story in the first paragraph and an Austrian/Lachmann subjective expectations view in the second section. While I agree that both aspects play a significant role in understanding current low real interest rates, there is a third uniting topic that I think is left out of Glasner’s post. The third topic is private debt and debt servicing costs, which may dampen demand for loans and simultaneously reduce expectations of future income. Unless the third topic is recognized as part of the problem, remedying the other two issues will prove temporary, at best.

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